Short Cash-To-Cash Cycles Will Prove Important as Economy Rebounds

Cash-to-cash cycles are tied to corporate profitability. The longer the cash cycle, the more time corporate funds are occupied in working capital. A short cash-to-cash cycle signifies good financial flow and ensures cash is on hand for corporate expenditures.

According to Moody's Corporation, non-financial U.S. companies are sitting on $1.84 trillion in cash reserves. Today's unprecedented cash levels are related to recession anxieties, causing unrealistic reductions in capital investment and operating expenditures. Economic improvement and normalization, however, will result in a rapid depletion of cash reserves.

In his annual board letter, U.S. billionaire investor Warren Buffet advised Americans that now is a good time to make major investments despite the gloomy economic environment. Before embarking on major cash depletion, the time is right for evaluating the cash cycle process to ensure cash flow is not adversely affected when spending ramps up.

Cash cycles are effected by three major factors: accounts payable, inventory and accounts receivable. How fast a company gets paid, how it manages inventory and the money it expends all effect a company's cash position.

Improving cash-to-cash cycles, therefore, must include:

Proper inventory management Accounts receivable cycle reductionMaximized accounts payable times

Addressing these components requires having the right supply chain management strategies, technology and industry knowledge relevant to your company.

Inventory Management Strategies

The definition of cash-to-cash cycles varies by company. Some companies believe their cash cycles start at product delivery and end at cash. The cycles actually begin further up the supply chain at inventory procurement, when raw materials are purchased, and continue through to receiving cash from sold products. An accurate measurement of the inventory cycle should include raw materials, deposits and work in progress. The "old days" inventory calculation of "average finished goods inventory divided by cost of goods sold" is simply misleading. Calculations should include all inventories, raw material (including in-transit) consignment, fixed cost of production, etc.

Cash cycle management, therefore, begins at initial inventory procurement. With the worldwide economic labyrinth ever growing and with intensified competition, inventory procurement becomes a global venture. Efficiently managing inventory on a global basis often requires outsourced expertise as many companies do not fully comprehend or have the personnel to manage all aspects of it. A third party logistics consultant that understands the chemical industry and its protocols can support chemical shippers in this effort.

For example, consider a widely-distributed material such as TiO2 (titanium dioxide) that has more than 100 worldwide suppliers and a ongoing price surge in America. A 35 percent price differential exists among vendors, depending on quality and country of origin. When attempting to buy this product from supplier sources around the world, a chemical company can face a variety of overseas procurement nightmares from expensive letter of credits, logistics problems, quality control and reliability.

Strategic planning can avoid such problems during the procurement process. Many third-party logistics consultants offer experience in developing sound processes that ensure timely and efficient product delivery and procurement. Strategies may include purchasing product at FOB (freight on board) destinations, establishing foreign trade zone (FTZ) warehouses, arranging customs automated clearinghouse (ACH) and making payments - without letter of credits that tie up liquidity in working capital.

Receivable Management Strategies

American exports rose 21 percent in 2010 to $1.28 trillion - the sharpest rise since 1988. As suppliers become more global, so do customers. While increasing exports is good news, shipments from Eastern U.S. to China can take up to 45 days. Traditionally, most Asian customers expect a 90-day payment term and typically pay in 95 to 120 days. The cash-to-cash process, in this instance, from raw material procurement to cash can extend to more than six months. As the economy improves and exports increase, the strain on cash might adversely affect companies without an adequate supply chain management process.

Through strategic planning, chemical companies can develop processes that drastically reduce long transit times and logistics costs while improving competitive advantage and cash flow. Establishing foreign trade zone warehouses is a strategy that can reduce inventory turnaround time when exporting to specific countries. With a warehouse established in China, product could be shipped in 10 vs. 45 days, reducing the amount of time inventory is held and reducing accounts receivable days.

Developing and maintaining an auditable duty free zone warehouse in an oversea market, however, requires expertise that, unfortunately, many manufacturing companies do not possess. That's where an outsource services provider provides support. Many 3PLs maintain a network of reliable locations of free trade zones for different chemicals as well as the processes with which to work with these outlets.

As inventory procurement becomes more globalized, establishing inventory in strategic locations that may include developing free trade zones, consignment warehouses, correct freight on board assignments, becomes more important. The goal of these different strategies is to shorten the amount of time funds remain in the inventory process.

Technology Supports Financial Flow

Technology is also an important component of the overall strategy to reduce cash cycles. Through technology, chemical companies automate financial processes and gain visibility into the financial flow to reduce accounts payable times and stretch accounts receivable. With effective business to business process automation, chemical companies are equipped to address quickly changing market conditions and increased trading complexity. Automating processes and sharing real-time information with customers, partners and suppliers also increases competitiveness and productivity.

According to an AMR Research study1, companies using more electronic connections with customers have:

13 percent shorter days sales outstanding (DSO)37 percent shorter cash-to-cash cycle times 19 percent lower total supply chain costs (including manufacturing), that translates into 5 percent of revenue

In lieu of acquiring new software and hardware to support these capabilities, 3PLs offer web-based transportation management system (TMS) technology that provide a "Visibility Manager," an aggregated (360 degree) view of the order-to-cash business process and its related transaction documents, such as purchase orders or advanced ship notices, sent through the business process network by customers and suppliers. Greater visibility means there is less uncertainty in accounts receivable and accounts payable if invoices are not correct and accounts are paid within a certain time frame.

Using TMS capabilities, chemical companies can address other supply chain issues such as complex cross-border invoicing, freight audit and payment, and benchmarking. Through better management of the supply chain, chemical companies will better manage working capital, resulting in improved cash cycles.

Now is the time to position your company to aggressively defend against C2C cycle increases as the economy heats up. By partnering with an experienced outsource, you can take advantage of their resources and experience to address a broader range of issues affecting your C2C cycle. At the same time, you may achieve further supply chain improvements that will justify the cost of using an outsource.

Francis Ezeuzoh is Chief Financial Officer at ChemLogix, LLC. He can be reached at www.chemlogix.com.

1 Bill Swanton, Debra Hofman, AMR Research, "Benchmarking B2B E-Business: The Value Is in There." January 3, 2007

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